There would appear to be a lot of confusion as to how mines make money. The ore-body (be it a conglomerate gold reef or the Merensky Reef which hosts the platinum deposits) is explored by geologists. They use large drills to take samples of the ore body to get a grade (how much gold/platinum per ton of rock). These samples are very small and so a geostatistician uses various statistical methods to evaluate all the available ground within the mining lease area. This results in a plan (map) of the mine which has lots of small blocks each with a value.
The mining engineer then plans the shafts and tunnels to get to the various mining areas. Shaft sinking and tunnelling is very expensive and it can take many years until they reach the mining areas underground. The capital thus put into the mine is locked up for the investors with no return until the mine extracts the ore-body and processes it for the commodity of interest. The price of the commodity could then have changed significantly from the estimate when the investor made his decision to finance the mine. This makes mining a very risky investment decision. The only reason why people invest in mining is that there is the potential to get a significantly higher return on their investment than by putting their money in the bank or even in other stock and bonds on the stock market.
Not all the reef blocks evaluated by the geostatistician are economical to mine. The mine has fixed and variable costs. The fixed costs include all the capital and labour that goes into the mine and the variable costs are item like explosives and timber which are only spent if mining takes place. There has to be a certain volume of mining before the fixed costs are covered, and only once that is paid does the mine actually move into a profitable state. The cost of mining each block is calculated as well as the revenue that block will generate. A cut-off grade is calculated and if the is below the cut-off, then it’s not feasible to mine the ore block. Thus the higher the cost of mining, the higher the cut-off grade will be. If the cost is too high, the mine runs into the situation that there are not enough blocks above the cut-off grade to reach the required volume of mining to cover the fixed costs. The mine then starts making losses. At this point the mine needs to reduce costs and as labour accounts typically for over half the costs. This usually involves retrenching part of the current labour force.
If the cost of labour goes up at a rate higher than the price increase for the commodity, the mine becomes uneconomical as there is just not enough ore above the cut-off grade left to mine, and it will close. This is the situation facing the mines currently. The labour costs have spiralled upwards due to higher wage demands as well as lower efficiencies. It was reported last week on News24 that South Africa’s efficiency is the lowest it’s been in the last 42 years – and when you consider how much more efficient it should be considering all the technological advances, this is very worrying.
According to the ANC SIMS Document (State Intervention in the Minerals Sector – March 2012), the amount of people employed by the mining industry is very low considering how much of the State’s income is generated from mining. Their policy proposal is to increase mining related jobs by becoming more involved in the sector and controlling the sector to a higher degree. This is however coupled to proposals for higher taxation too for the sector.
Investors in the mining sector will not invest in South African mines if they do not see potential in higher returns. By limiting the potential earnings by the proposed ‘Super Rent Tax’ as well as forcing companies to spend more on labour, the mines will have less ore blocks above the cut-off value. The recently enforced Mining Royalties Tax is a direct cost, payable if the mine is profitable or not, based on the amount of ore extracted from the ground. Mines just cannot keep facing increasing costs and remain open. There are already severe reductions in foreign investors investing in South African mines and this will continue to shrink as investors put their money in countries offering better returns. Talk of Nationalisation and a ‘Mining Revolution’ by certain radical political elements further enhances the investors’ fears and cause them to view the South African mining sector as a poor investment choice.
The ANC SIMS Document proposes that the State takes over a lot of the mineral exploration activity taking place currently.
They will then have the first option to mine any deposit discovered using the newly created State Mining Company. This exploration activity however is very limited considering how much is taking place in the other regions of Africa. It is too limited to keep the current mining production levels let alone grow the sector. Mineral exploration (especially drilling) is very costly and only 1 in 10 deposits discovered actually becomes a mine. This is the domain of very risky investors, and the government is looking for guaranteed safe returns. The proposed ANC policy is flawed and will kill the remaining minerals exploration in the country, and ultimately kill what mining is left along with all the associated jobs.
To conclude, we have recently seen at Lonmin what happens when mine workers start demanding wages higher than the industry can sustain. The workers have become pawns in a union power struggle which appears to be part of a larger power struggle leading all the way to the top office of this country. The result of this is mines will become uneconomical, people will loose their jobs and poverty will become even higher than ever previously experienced in this country.
Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.